But in spite of this solid economic data financial markets are
clearly pricing in concerns about the economy and the future of
Federal Reserve policy as aggressively as they have in years,
even without the data on their side.

"While financial markets may be behaving as though the US economy
is on the cusp of a recession, the economic data (specifically as
it pertains to the American jobs market and thus 70% of the
economy that is the consumer) continues to belie that view,"
writes David Rosenberg at Gluskin Sheff.

In a four-day week for the US markets, we'll get readings from
the housing market, the labor market, and inflation to keep us
posted.

Top Stories

Federal Reserve Chair Janet Yellen does not foresee a
recession. "As is always the case, the economic
outlook is uncertain,"
Yellen said Wednesday and Thursday before both the House
and Senate. The volatility of financial markets and the
continued decline in oil prices certainly pose a risk to the
economy, but the strength of the labor market and continued
gains for American consumers does not have the Federal Reserve
worried about an outright contraction. Yellen added that any
future rate hikes from the Fed are not on a preset course, with
the Chair largely punting on the issue of what to expect from
the Fed's March policy announcement. As Ian Shepherdson, an
economist at Pantheon Macroeconomics, said following Yellen's
remarks this week, "Overall, though, Dr. Yellen did not sound
dovish enough for the doves or hawkish enough for the hawks, so
we are inclined to believe her when she says '...monetary
policy is by no means on a preset course.' The March decision
will depend on the labor market data, which in all likelihood
will signal the need for higher rates, and a host of market
developments and non-labor data, which likely will not. We're
sticking to our 55/45 call in favor of a March hike, but it
will be close either way."

Negative interest rates dominated the
conversation. Everywhere you looked this week,
negative interest rates were in focus. Yellen was asked at
length about the possibility for the US to take its benchmark
interest rates into negative territory,
acknowledging that while the Fed examines all possibilities
the central bank's legal authority to enact negative rates
remains unclear. But as financial markets digest negative
interest rates — which now cover about one-fifth of global GDP
— the early verdict has been that this next "innovation" in
monetary policy will be unlikely to achieve its desired
effects. "Although it is difficult to know the
counterfactual because this is such an unprecedented
situation, it appears that NIRP has not been especially
impactful in lifting growth or inflation, or in lifting
expectations about future growth or inflation,"
wrote PIMCO CIO Scott Mather. "Instead, it seems that
financial markets increasingly view these experimental moves as
desperate and consequently damaging to financial and economic
stability."

Mark Dow at
Behavioral Macro wrote this week that, "We have all
witnessed the diminishing marginal effects from
exceptional monetary policy. As I’ve long argued, if
we understood monetary policy better it would work less well.
Guess what? We’re starting to understand it. People need to
want to take risk if the economy is to grow,and the
price of money is a much smaller factor in these decisions than
traditional economic theory leads us to believe."
And so while negative interest rates make it more attractive
— in theory — for money to be lent in search of
some productive and positive economic return rather than
hoarded or put in a rent-seeking asset, the practice is not
bearing this out. Seen as a tax on the banking system instead,
negative rates have very much gotten a bad name.

Deutsche Bank says it is "rock-solid," announces bond
buyback. On Monday, February 8, financial markets woke
up and
decided that Deutsche Bank's contingent convertible debt
obligations — or CoCo bonds — were the most important thing
you'd never heard of. CoCo
bonds are essentially bonds that can become stocks. First
issued in the wake of the financial crisis and mostly
by European banks, CoCo bonds are a creative way for banks
to meet regulated capital requirements. In exchange for a
higher yield, these bonds offer investors fewer protections.
Deutsche Bank's CoCo bonds were put in the spotlight earlier
this week as the firm's stock price fell to a record low and
co-CEO John Cryan said in a statement on Tuesday that the bank
is "absolutely
rock-solid." This followed a Monday afternoon statement
from the firm that an April coupon payment on one of Deutsche
Bank's CoCo bonds was not at risk.

On Friday,
the bank then announced a $5.4 billion bond buyback. With
Deutsche Bank's debt trading at a discount, paying out this
cash now could lower its long-term obligations. It does,
however, dent the bank's liquidity profile Banking is a
business based on confidence but dependent on liquidity. And as
Bloomberg's Matt Levine wrote this week, "The fact
that the market would reward Deutsche Bank for
reducing its liquidity to improve some theoretical
accounting metrics suggests that its concerns about Deutsche
Bank just aren't that pressing."
Deutsche Bank shares rocketed higher on Friday.

Economic Calendar

Empire State
Manufacturing (Tues.): Economists expect the latest
reading on manufacturing activity in New York state showed a
continued to decline in February. The latest Empire State
manufacturing report from the New York Federal Reserve is
expected to come in at -10, better than January's -19.4 reading
but still indicating contraction in New York manufacturing.

Housing Starts and
Building Permits (Weds.): Housing starts are expected to
rise 2.3% in January while the number of permits for building
construction is expected to rise 0.1%. Both figures contracted
in December. Housing starts are expected to rise to an
annualized pace of 1.175 million homes, according to Bloomberg.
Building permits should total an annualized rate of 1.205
million. Economists at BNP Paribas write that a decrease in
construction hours worked in January pose a downside risk to
their starts forecast, which is just below consensus at 1.17
million annualized.

Producer Price Index
(Weds.): Economists estimate producer prices for final
demand fell 0.2% in January with the continued decline in
energy prices expected to weigh on the reading. Compared the
prior year prices are expected to fall 0.6%. On a "core" basis,
which excludes the more volatile costs of food and gas,
producer prices are expected to rise 0.1% over the prior month
and 0.4% over last year.

Industrial Production
(Weds.): Industrial production is expected to rise 0.4%
in January, beating December's 0.4% decline and indicating a
rebound in activity in January. Capacity utilization, a measure
that can often point to inflationary pressures building in the
economy, is expected to rise to 76.7% in January after hitting
76.5% in December. Economists at UBS write that this rise will
mostly reflect a weather-related uptick in utility usage.

FOMC Minutes
(Weds.): The minutes from the Federal Reserve's January
meeting are set for release Wednesday afternoon. Markets will
look for further discussion about global financial markets and
any developments in the US economy for clues as to what the Fed
may be thinking not only about raising rates at its March
meeting but any future rate increases later this year. Joe
LaVorgna at Deutsche Bank writes, "As Fed Chair Yellen’s
monetary policy testimony indicated last week, the recent
meaningful tightening of financial conditions has added
considerable uncertainty to the Fed's outlook relative to its
most recent forecasts from last December. Yellen's testimony
provided a blue print for what we can expect to see in the
minutes of the January 26-27 FOMC meeting."

Philadelphia Fed
Business Outlook (Thurs.): The latest reading on
business activity from the Philadelphia Federal Reserve is
expected to show a continued contraction in activity from the
region. The Philly Fed index should come in at -2.9, indicating
a decline in business conditions, though this reading would be
slightly better than the -3.5 seen in January. UBS, which
expects the index to come in at 0.0 for February, write that,
"If factories are finally finding demand for their products,
the inventory correction will begin to weigh less on overall
growth."

Initial Jobless
Claims (Thurs.): After a stronger-than-expected reading
last week, initial claims for unemployment insurance should
total 275,000, indicating continued strength in the US labor
market. As analysts at Bespoke write, "This relatively
intuitive and simple series is extremely valuable, because
unlike other employment data, it's not a statistical sample.
It's true hard data; actual counts of real people." The firm
added that a sustained increase in claims would've increased
concerns about recession, but last week's reading "did a lot to
assuage those fears."

Consumer Price Index
(Fri.): The latest reading on inflation is expected to
show consumer prices fell 0.1% in January while prices
increased 0.2% when excluding the more volatile costs of food
and gas. Compared to the prior year, "core" inflation — which
is ex gas and food — is expected to rise 2.1%. And while this
is not the Federal Reserve's preferred measure of inflation
(that honor belongs to personal consumption expenditures), a
2.1% year-on-year reading would be slightly above the Fed's 2%
inflation target.

Market Commentary

The problem is that the challenges in the energy sector are not
spilling over to the broader economy and the macro data is not
deteriorating ... Despite the macro data doing well
pessimists often try to convince me that we are on the road to a
full-blown credit crisis, which will push the economy
into a recession, and we have been on this path since credit
spreads started widening in July 2014. But if this is
true, why did the data for January show an acceleration in
consumer spending, a decline in the unemployment rate, an
acceleration in wage inflation, and an increase in consumer
confidence?

Most importantly, if we for the past 18 months have been
moving toward a credit crunch why is the weekly data for bank
lending still showing no signs of a slowdown in bank
lending?

A late Friday release from the Federal Reserve showed that bank
lending is right at its strongest levels since the financial
crisis.

The latest Senior
Loan Officer Opinion Survey suggests that tighter credit
conditions are coming to the US economy. And with the Fed raising
rates, this isn't unexpected. But for a strong argument that the
US economy is getting worse, credit market conditions will need
to deteriorate further.